IMF Working Papers

The Decentralization Dilemma in India

ByCatriona Purfield

February 1, 2004

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Catriona Purfield. "The Decentralization Dilemma in India", IMF Working Papers 2004, 032 (2004), accessed 12/7/2025, https://doi.org/10.5089/9781451845143.001

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Already in precarious shape, the financial health of India’s states took a turn for the worse in the late 1990s when state deficits and debt rose sharply. While India is among the world’s most decentralized economies, greater decentralization is not the root cause of this situation. Panel estimation techniques find evidence that the trend rise in deficits reflects problems of transfer dependence and moral hazard that undermine states’ incentives to control deficits.

Subject: Budget planning and preparation, Central government spending, Expenditure, General government spending, Government debt management, Public financial management (PFM), Tax incentives

Keywords: Africa, bailout expectation, borrowing framework, Budget planning and preparation, Central government spending, country, cross-state divergence, deficit, Europe, Fiscal policy, General government spending, government, Government debt management, government expenditure, India, intergovernmental fiscal relations, levels of government, panel econometrics, State borrowing, State expenditure, State finance, state finances, State population, State structure, State transfer, World Bank states database, WP

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